Carbon capture, an old energy industry technique to help amplify oil production, is breaking into the conversation about solving global climate change. At least that's the goal of an oil industry marketing blitz aimed at convincing investors that crude oil producing "net zero" emissions is attainable.
The pitch: The technology can be used to "capture" and then permanently store harmful greenhouse gases.
A long list of energy industry leaders have lined up to both use and provide carbon capture services. Among them are Occidental Petroleum, Exxon Mobil, Air Products and Archer Daniels Midland. Also Talos Energy and Denbury. They're pouring billions of dollars into developing a carbon capture market estimated at a modest $2 billion in 2021.
The companies predict big growth. Occidental estimates the carbon capture market will hit $50 billion a year by 2030. Exxon sees it going as high as $4 trillion by 2050.
Yet big questions remain. Current carbon capture revenues rely heavily on federal incentives. One important issue over the longer term is whether carbon capture can stand on its own as a viable industry. Another is if the technology will really help reduce greenhouse gas emissions. Are oil producers simply using the net zero target to attract climate-sensitive investors' dollars? Or perhaps using it as a pass to keep producing oil in an era of rising restrictions?
Carbon Capture, And The Carbon Neutral Rush
Zeroing out the fossil fuel impact involves some dexterous accounting. In the carbon capture process, filtration equipment separates carbon dioxide gases either from factory or industrial emissions, or directly from the atmosphere. They then compress and inject those gases into underground reservoirs.
Each ton of C02 gas sequestered earns an offset. These offsets are credits weighed against an emitter's total gross greenhouse gas emissions. Sequester enough gas to offset 100% of company emissions and that company exerts a net zero impact on the atmosphere. At least in theory.
Carbon capture is nothing new. Oil and natural gas producers for decades have reinjected production site exhaust. It's a means to pressurize reservoirs and coax additional product out of the ground.
But as science has discovered more about how emissions affect the atmosphere, and about how the evolving atmosphere determines the climate, capturing exhaust emissions has taken on added value. Energy companies can clean and capture their own emissions. Or, to a lesser extent, they can provide those services to client companies — though this market remains extremely small. But in either case the goal is to earn carbon offsets.
Offsets are a quick way to ratchet up the "E" component in a company's ESG (Environmental, Social and Governance) ratings. Those ratings have become an important gauge for institutional investors, including index funds and sovereign wealth funds.
The Conference Board reports that more than 20% of the Forbes 2000 companies already have "net-zero" emissions targets in place. So the carbon capture client list is long and still growing.
Early Players: Occidental, Exxon, Chevron
Occidental is among the leaders staking early claims in the carbon capture market. The Houston-based company this year has become a key investment target of Warren Buffett's Berkshire Hathaway. Berkshire has built a 19.18% stake in the company.
Occidental has set up subsidiary businesses to focus on carbon reduction. It was also an early player in carbon offset deals aimed at marketing "net-zero oil."
Exxon has also bet big on carbon reduction efforts. The energy giant in 2021 announced plans to invest $3 billion over five years in new carbon reduction efforts. That's despite the fact that there is not yet a set, per-ton price for clients to pay carbon extractors.
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Other companies of all sizes and shapes, and across various industries, have announced intentions to reach net-zero emissions. Among oil producers, Exxon and Chevron aim to be carbon neutral by 2050. Outside of the energy field, companies including Coca Cola and General Motors have set net-zero targets of 2040.
Much of that momentum followed a May 2021 International Energy Agency (IEA) report that outlined how the energy sector could attain net-zero status by 2050.
Federal Incentives To Hit Net Zero
The Biden administration has made carbon capture and sequestration projects a key part of its platform. The administration says it aims to achieve net-zero greenhouse gas emissions in the energy sector by 2035. And across the full U.S. economy by 2050.
Biden's $1 trillion infrastructure bill approved in 2021 earmarked more than $12 billion for carbon capture projects and infrastructure. It also includes funding for the Department of Energy's Office of Fossil Energy and Carbon Management.
Besides emissions offsets and federal development financing, companies have tax incentives. For more than a decade, a long-standing tax credit known as 45Q has been the main federal incentive urging companies to capture and store carbon. This program provides a tax credit of $30 to $50 per metric ton of carbon dioxide.
The gas must remain permanently stored underground. Carbon gas not used to enhance oil production earns a higher tax credit value.
The tax incentive got its start as part of the Energy Improvement and Extension Act of 2008. At that time, it provided $10-$20 per metric ton. The per-ton rates are adjusted each year for inflation.
In 2018, 45Q was reformed as part of the Bipartisan Budget Act. The law made companies in a broader range of industries eligible to claim the credit. Historically, however, companies have announced upcoming carbon capture projects and then canceled them later on, says Paola Perez Pena, a gas, power and climate solutions analyst for S&P Global Commodity Insights.
"This time it seems to be different because policy seems to be moving in the right direction," she said. "There is the interest from the private and the public sectors to move policy ahead and celebrate the deployment of these projects."
How To Capture Carbon
Companies currently use one of two carbon capture techniques. The first, called point-source capture, has been around for decades. This mode attaches carbon-scrubbing equipment directly to flue stacks in factories, power generation stations or other industrial carbon sources.
From there, specialized pipelines transport the captured carbon dioxide over varying distances to sites for injection into underground reservoirs, usually deep rock formations.
Oil and gas companies have long utilized this basic process for what is called enhanced oil recovery (EOR). CO2 generated and captured in oil and gas production gets reinjected into older reservoirs that are losing pressure. These pressurized injections increase the wells' output.
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Former Assistant Secretary of Energy Charles McConnell, who now heads the University of Houston's Center for Carbon Management in Energy, says it is critical to understand that carbon sequestration projects cannot happen just anywhere.
Projects are dependent on geology that is "suitable for CO2 injection and long-term permanent and safe storage," McConnell said.
A limited number of U.S. regions satisfy those requirements. One area that checks off all the boxes when it comes to geology pipeline infrastructure and concentration of industry carbon emissions is the Gulf of Mexico, according to McConnell.
"You have a perfect storm, if you will, along the Texas Gulf Coast, where you can enable CCUS (carbon capture, utilization and storage) in a big way and have it be most effective and efficient in deployment," McConnell said.
Occidental Petroleum Embraces New Technology
The second method is an emerging technology called direct air carbon capture.
Unlike point-source capture, direct air capture does not attach to a flue stack. It scrubs the target gases directly out of the atmosphere. That provides broader flexibility in siting facilities, allowing the scrubbing technology to sit much closer to the geological area for carbon injection.
This method cuts the cost of pipeline infrastructure. But the scrubbing technology itself is more expensive.
Occidental is an early adopter, attempting to scale-up direct capture technology to a plant capable of sucking in around 1 metric ton of carbon per year. In March, Occidental told investors that it will spend around 5% of its 2022 capital expenditures to start construction on the plant in the Permian Basin. The company projects that the spending will come to $100 million to $300 million in 2022. The plant will cost between $800 million and $1 billion in total.
Large-scale projects are defined as those involving the capture of at least 0.4-0.8 metric tons per year of carbon dioxide, according to the IEA. The vast majority of the current plants are smaller in scale. They normally sell the captured CO2 for use in for carbonating drinks or other purposes, according to the IEA.
Scaling Up Carbon Capture Worldwide
Occidental reports already having customers lined up to take advantage of the Permian Basin facility, expected to be operational in late 2024.
In addition, the company agreed to sell "net-zero oil" to South Korea's SK Trading International.
Occidental further agreed to sell 400,000 metric tons of carbon offset credits from its direct air capture facility to airplane manufacturer Airbus. Offset credits are purchased guarantees of carbon dioxide reductions to compensate for emissions made elsewhere.
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Occidental's roadmap calls for bringing three carbon-sequestration hubs online by 2025, and building 70 direct air capture plants across the world by 2035.
Low Carbon Ventures, an Occidental subsidiary, focuses entirely on reducing carbon emissions. On June 27, 1PointFive, a Low Carbon Ventures unit, announced it entered a lease agreement with Manulife Investment Management for around 27,000 acres in Louisiana. 1PointFive now has the rights to develop and operate a carbon sequestration hub in the state.
"(Occidental has) a long history of doing EOR, using it, creating that revenue, but they are really pushing to be the first mover in a new area of CCUS. (They want) to be in the right position when carbon prices go up and policy changes," said Deb Ryan, head of low carbon analysis for S&P Global Commodity Insights.
Other Carbon Capture Projects And Players
Nearly 30 large-scale CCUS projects now operate worldwide, according to information compiled by S&P Global Commodity Insights along with data from the Global CCS Institute, a think tank that focuses on carbon capture and storage. Eight of those are in the U.S. Another 19 enhanced oil recovery projects operate globally, seven of them in the U.S.
Besides Occidental, Exxon, Air Products and Archer Daniels Midland all have operating carbon capture projects in the U.S.
Talos Energy has announced four projects, Exxon has two more projects in the works and Denbury has two of its own. California Resources, Shell and Oxy all have announced projects.
Private companies including Koch Fertilizer, Dakota Gasification and Lucid Energy have also entered the carbon capture market.
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In total, more than 50 carbon capture projects are planned for the coming years.
Among those, Exxon announced earlier this year it is planning a hydrogen production plant and one of the world's largest carbon capture and storage projects. It will be at its integrated refining and petrochemical site at Baytown, Texas. This is part of Exxon's "blue hydrogen" play, which it sees as an integral part of its carbon neutral strategy.
In June, Exxon announced a partnership with Shell and China National Offshore Oil Corporation. They plan to develop China's first large-scale offshore carbon capture and storage hub. The announcement claimed the facility could capture up to 10 million tons of CO2 a year.
Oil field services players are also grabbing a piece of the carbon capture action. Halliburton wrote in an email that it "has participated in more than 50 carbon capture projects" worldwide. It has reportedly worked on pipeline repurposing, subsurface evaluation for storage sites, well risk assessment and other evaluation services.
Carbon Capture Counterpoint
Among the detractors speaking out against carbon capture, the Center for International Environmental Law released a report in July 2021 condemning the approach. The Geneva, Switzerland-based nonprofit argued such projects provide "the fossil fuel industry with a license to continue polluting."
CCUS facilities rarely capture a meaningful amount of carbon dioxide. And they "in fact worsen the climate crisis when used to boost oil production," according to the report.
The organization also takes issue with the scalability of CCUS technologies, their high costs and their effectiveness.
"Existing CCS facilities capture less than 1% of global carbon emissions," the report says. "They cannot play any significant role in the rapid reduction of global emissions necessary to limit warming to 1.5°C."
Carbon Capture Infrastructure And Oversight
McConnell, at the University of Houston, disagrees with the notion that carbon capture is a ploy, allowing fossil fuel providers to continue unlimited production.
"It's not," McConnell said. "It's an environmentally progressive technology that's going to lower emissions."
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However, carbon capture requires a ramp-up in regulatory oversight to confirm that capture technologies do what they're designed to do and that gases injected underground stay there. Regulators must ensure incentives are appropriately managed to keep companies motivated to participate.
And the biggest issue with CCUS in the U.S., McConnell says, is the lack of infrastructure to safely transport carbon dioxide to locations where it can be stored.
He estimates around 5,000 miles of C02 pipeline now exists in the U.S. This would need to increase to 50,000 miles if broad commercial carbon capture is adopted, according to McConnell.
"We need, if you will, an interstate highway system to be able to move the C02 from point to point," he said.
Oil Is Losing Investment
Nevertheless, investment and lending to oil and gas companies is down across the board. Private-equity capital for oil and gas is down 70%-80% over the last several years, according to a March Dallas Federal Reserve industry survey.
Analysts trace the drop to investors' interest in low-carbon products and ESG ratings. They point to ESG as a clear driver for oil companies now focusing on carbon capture projects and messaging.
"ESG is fundamental, I believe, to many of these companies embracing the need to bring CCUS forward," McConnell said.
Carbon capture does lower the amount of carbon in the atmosphere, according to Peter McNally, an energy analyst for Third Bridge. But it also allows existing oil and gas production operations to continue. This makes the projects beneficial to a company's overall portfolio.
"Meanwhile, they become a lower-emission business," McNally said.
Pena also says ESG is motivating companies to announce CCUS projects. As the industry ramps up, she says, companies understand demand will rise for expertise in transporting and injecting gas.
"(Companies) know there is an opportunity if the policy improves so they can be positioned commercially there," she said.
Creating A Carbon Market
With some regional exceptions, no fixed value for CO2 now exists. The European Union has the largest carbon market in the world. In 2022, emission credits in the European market have traded at $50-$97 per metric ton. Canada also has a carbon price.
The lack of fixed prices, other than in relatively modest tax credits, makes large-scale capture and sequestration projects vague endeavors in terms of cost-benefit analysis. But analysts predict the worldwide carbon capture utilization and storage industry could grow at a compound annual rate of 13% to 19% in the next decade.
Energy companies with carbon capture infrastructure are contracting the service out to other industries, according to the American Petroleum Institute. The oil and gas industry accounts for nearly 62% of current CCUS operations. Enhanced-oil recovery projects remain the key industrial use for carbon dioxide, according to an analysis by business insights group Research and Markets.
Oil Industry Remains The Primary CCUS User
Meanwhile, the vast majority of CCUS projects rely on revenue from oil companies using CO2 for enhanced oil recovery, according to the IEA.
"It was all market-driven, (so) it all makes sense for the oil and gas companies," Pena, the S&P analyst, said. "You produce CO2, you inject CO2 to increase production and lower the carbon footprint of oil."
Ryan, of S&P Global Commodity Insights, says the current market price of carbon falls short of what's needed to fund carbon capture and sequestration projects.
Canadian officials are forecasting an increase to the country's fixed carbon cost to around $130 per ton by 2030. Canada's price of carbon has increased from $10 (Canadian) per metric ton in 2018 to $50 in 2022.
"That starts to be when the price of carbon and the cost of CCUS start to be similar. That's when you actually start to see that investment," Ryan said.
Please follow Kit Norton on Twitter @KitNorton for more coverage.
